Budget needs to put the brakes on fiscal drag

United Kingdom 12 Mar 2013

This is no longer the 1980s where only a small number paid the 40 per cent income tax. Many people who are working but struggling at the lower end of that bracket will not get much respite from an increase in the personal allowance. The Chancellor of the Exchequer should use the Budget on 20 March to give taxpayers a much-needed boost and raise the personal allowance for all income tax rates otherwise it is being less than honest

—Chas Roy-Chowdhury, head of taxation,ACCA

The Chancellor of the Exchequer needs to use the Budget to increase the personal allowance threshold further than planned without decreasing the level at which the 40 per cent tax band bites. Failing to do so risks pulling even new entrants to the jobs market and many more pensioners in to the 40 per cent tax band , warns ACCA (the Association of Chartered Certified Accountants)

ACCA says that with the 40 per cent income tax band set to widen in the new tax year (from 6 April 2013) to capture those with a taxable income of between £41,450 to £150,000, the planned personal tax allowance of £9,440 will be all but cancelled out for many taxpayers caught in the new higher rate tax bracket.

From 6 April, those turning 65-years-old from that date will no longer benefit from the higher personal allowance older pensioners receive, which means some pensioners, who fall into the new 40 per cent tax bracket because of income from savings, dividends and part-time work, will be bitten by their tax bill, warns ACCA.

Chas Roy-Chowdhury, ACCA head of taxation, said: 'This is a classic example of giving with one hand and taking with the other. It looks good for the Government to say that they are extending the personal allowance, but it is only true for the ever shrinking population of 20 per cent taxpayers. By dropping the threshold for the 40 per cent income tax bracket, many hardworking people who will begin paying 40 per cent for the first time will lose the benefits of the increased personal allowance and they will need to pay additional tax on such things as savings and dividend income.

'This is no longer the 1980s where only a small number paid the 40 per cent income tax. Many people who are working but struggling at the lower end of that bracket will not get much respite from an increase in the personal allowance. The Chancellor of the Exchequer should use the Budget on 20 March to give taxpayers a much-needed boost and raise the personal allowance for all income tax rates otherwise it is being less than honest.'

ACCA says in the late 1980s, when the 40 per cent rate was first introduced, it was estimated just 5 per cent of workers paid 40 per cent tax, now it’s more than 15 per cent.

Chas Roy-Chowdhury added: 'Let’s not forget that there are other taxes working families up and down the UK must pay in addition to income tax. It’s no use looking in isolation at income taxes. Add council tax, capital gains tax and VAT to the amount taken from a person’s income and it begins to take its toll. Try telling struggling households it is their moral duty to pay tax when they are feeling this strain on their finances.'

Tax burden

ACCA says that despite considerable talk of a Mansion Tax it was unlikely the Government will introduce yet another tax at this time. ACCA says the fuel duty will be frozen because the Government can afford to do so. ACCA points out that the Chancellor is doing very well from increased VAT revenues on the higher fuel prices, so the duty freeze is not felt anywhere near as much by the Government.

Chas Roy-Chowdhury said: 'There is likely to be a lot of good news on the face of it, but a closer look at the small print will reveal more. It is likely the Government will announce a Married Couples Allowance, but it is highly likely only to be made available to those in the 20 per cent tax threshold.